Credibility and Monitoring: Outsourcing as a Commitment Device

Posted: 19 Jan 2012

See all articles by Benjamin Bental

Benjamin Bental

University of Haifa - Department of Economics

Bruno Deffains

Université Paris II - Panthéon-Assas; Institut Universitaire de France

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Date Written: Spring 2012

Abstract

We analyze an environment plagued by double moral hazard where the agent’s effort level and the principal’s precision in monitoring are not contractible. In such an environment, the principal tends to over‐monitor thereby inducing low effort. To ease the latter problem, the principal may choose to increase monitoring costs by outsourcing the activity. As a result equilibrium monitoring is reduced and incentives become more powerful. This choice is particularly likely when the worker’s effort is an important factor in determining output.

Suggested Citation

Bental, Benjamin and Deffains, Bruno and Demougin, Dominique, Credibility and Monitoring: Outsourcing as a Commitment Device (Spring 2012). Journal of Economics & Management Strategy, Vol. 21, Issue 1, pp. 31-52, 2012, Available at SSRN: https://ssrn.com/abstract=1987969 or http://dx.doi.org/10.1111/j.1530-9134.2011.00327.x

Benjamin Bental (Contact Author)

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Bruno Deffains

Université Paris II - Panthéon-Assas ( email )

12 place du Pantheon
Paris cedex 05, 75005
France

Institut Universitaire de France ( email )

103, bld Saint-Michel
75005 Paris
France

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

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